Harry Hamburg – Exponential Investor (United Kingdom) –
When it comes to crypto, it’s easy to fall down the rabbit hole and forget the fundamentals.
So, for today’s issue, I’m going to answer the top five crypto questions we get asked here at Southbank Research.
Whether you’re crypto veteran with hands of steel, or just starting out, I think you’ll find today’s issue extremely helpful. So let’s get started.
1. Can people steal my Bitcoin?
This is one of the questions we get asked most often, and it’s easy to see why. Unlike cash or transitional investments you are responsible for storing your own crypto safely.
How does storing cryptos work?
- Cryptos are stored in a digital wallet.
- This wallet has a private and a public key.
- The private key allows you to transfer funds out of it. The public key allows you to transfer funds into it.
- If you lose your public key, you can still access it with your private key.
- If you lose your private key, you lose assess to your wallet’s funds.
- If someone discovers your private key, they gain access to your funds.
It’s as simple as that.
So, as you can see, it’s extremely important that you keep your private key, well, private.
You should never store your private key on your computer, email, smartphone, or any device that has been connected to the internet. Hackers can and do steal private keys from these devices.
The best practice is to write down your private key on paper, or print it out. This is called a making a paper wallet.
Make a few different copies of your paper wallet and then destroy the digital copy of it.
Then store these paper wallets in a few different secret places – a safety deposit box in a bank is a pretty good one.
The problem with this method is when you want to access your funds again.
Whenever you want to access your funds, you will need to type your private key into your wallet, either on your computer or smartphone. This is a slow process, and every time you do it, you’re at risk of a hacker stealing your private key and taking your funds.
So, this is only really a good solution if you’re not moving your funds around very often. And even then, it’s not super secure.
A better, more secure and simpler solution is to get a hardware wallet
These hardware wallets are essentially tiny computers cased inside USB sticks. The two leading companies are Trezor and Ledger, and they are both very well regarded.
Hardware wallets give you all the advantages of paper wallet, with the speed of a desktop or mobile wallet. They are also much more secure than any of the other types of wallet and very easy to use. But they cost around £100.
Your private keys are stored, encrypted, on the device. So no one can see them. Not even you. Even the computer you connect your wallet to when you use it to trade can’t see them. So in theory, hardware wallets cannot be hacked.
And if you lose it, or even if someone steals it, it’s not the end of the world.
If someone finds your Trezor or Ledger wallet they still need your pin code to use it. And with every wrong attempt the time they need to wait before they can try again doubles. After a few wrong attempts they are locked out for years. This means they can’t be cracked by a password cracker.
But what if you lose your hardware wallet?
When you set up your device you also create a “passphrase” of 20 or so words. You write these down on paper and store them like you would a paper wallet. This passphrase can be used to restore your wallet if you lose or break your device.
Honestly, if you have the money – and if you have the spare cash to invest in cryptos you really should – just get one of these.
They are faster, easier to use and safer than all the other methods, and they can store a large variety of different cryptos. So you don’t end up trying to keep track of multiple different wallets for your multiple different holdings.
Both Trezor and Ledger are great. I’d say just pick whichever supports more of the cryptos you hold. They both support bitcoin, Bitcoin Cash, Ethereum and all Ethereum tokens.
Here are the official sites:
However, even with hardware wallets, we’re still left vulnerable to the “sock drawer attack”.
Don’t forget about your passphrase
So, you have your cryptos super securely stored on a hardware wallet. And you have your passphrase written down on paper in case your wallet breaks or gets lost.
But now, you’re vulnerable to the sock drawer attack, as perfectly illustrated by this cartoon.
When storing your passphrase, it’s a good idea to either write it down in a code that only you know, or to store it like any other valuable – in a safe.
It’s quite funny that one of the best places you can store your passphrase is in a bank’s safety deposit box, given that bitcoin was created as an alternative to our current corrupt banking system.
Here is a list of what each wallet supports:
Just pick whichever one supports more of the cryptos you have, or get both.
A note about exchanges
Remember, when your cryptos are on an exchange, they aren’t really yours. They are kept by the exchange.
Because of this, an exchange is an even less secure place to store your cryptos than your own wallet on your computer or on paper.
At least once a month there is a new story of an exchange being hacked or going bankrupt and taking millions of pounds of customers’ cryptos with it.
So never store your cryptos on an exchange for longer than you have to. Move them to your own hardware wallet at your first opportunity.
2. Are cryptocurrencies a scam?
The short answer is yes, many cryptocurrencies and Initial Coin Offerings (ICOs) are scams.
Just like any industry that attracts a lot of money to it, it also attracts scam artists and fraudsters.
However, this doesn’t mean all, or even most cryptos are scams.
A good way to work out if a crypto is a scam, is to look at the team behind it. Look at what they have done before. Look and see if they have completed similar successful projects in the past.
For instance, a scam ICO made waves this year by using a picture of Ryan Gosling for one of its supposed team members.
The guy on the bottom left looks a little familiar, doesn’t he?
Even though this ICO was called out as a clear scam attempt, it still raised $830,000.
The more established a crypto is, the less likely it is to be a scam. For instance, Bitcoin and Ethereum, the two biggest cryptos, are not scams.
Most of the top 100 cryptos are not scams.
When you get to smaller and less well-known crypto – and particularly ICOs – it gets harder to tell.
That’s why it’s a good idea to search around and do your own research if you’re worried something might be a scam.
You can start by literally typing “is [name of crypto] a scam?” into Google and having a look at the results.
The crypto community is very active in calling out scams, so it makes a lot of sense to routinely Google any crypto you’re thinking of investing in.
I have also written a full article all about popular types of crypto scams and how you can avoid them here. Have a read of it, and remember to always thoroughly research any crypto you plan on investing in for yourself.
3. How much money can I make with crypto?
Well, that depends.
It is not uncommon for crypto investors to make ten times their money or more in just a few months. It’s not uncommon for crypto investors to lose 50% or 70% or their initial investment over a few days.
That’s the best and worst thing about investing in crypto. The potential gains on offer are huge, but so are the potential losses.
For example, one of the biggest (and most controversial) cryptos, Ripple was trading for $0.23 on 10 December. By 4 Jan, it was at $3.82.
That’s over a 1,500% price increase in less than a month.
What happened next?
Well, by 6 February, its piece was back down to $0.59.
Yes, those people who bought in early December were still up. But those who bought in early January were down 84%. And many, many people bought Ripple in early January.
Or take the crypto market as a whole.
In April 2017 it was worth a collective $27 billion. By January 2018, it was over $800 billion. That’s more than a 2,800% increase.
It made many investors rich. But then, we had the crash, and the market is now hovering around $400 billion.
Investors who bought in early January are looking at 50% losses.
These price swings are a fundamental part of crypto markets. So, as I say, yes you can make 10 times or even 20 times your money in crypto, but you can just as easily lose it all.
How can you combat this? I here’s my four-step plan.
1. Only invest money you can afford to lose.
You hear this all the time. But there’s a reason for it. If you’re only putting in money you can do without, you can afford to hold through the dips and not miss out on the rallies.
This is how you avoid being a weak hand and it’s your main line of defence against market manipulators.
And by money you can afford to lose, I mean money you could literally throw away and not have it affect your life in a negative way.
2. When buying in, use dollar-cost averaging.
Dollar-cost averaging basically means buying a certain amount every week or month, no matter what the price is at. That way, you don’t need to try time the market.
Let’s say you decide to put £500 in. You could dollar-cost average your buy by putting in £100 a week over five weeks.
The reason this tactic works well in the world of crypto is it’s incredibly difficult to know how long a run or a crash will last. If you try the market there’s a good chance you’ll end up buying high and selling low.
3. Keep a stack of cash ready to buy.
That being said, it’s a good idea to hold back some of the money you plan on putting in. This lets you take advantage of the wild swings we see in crypto.
So, to use the above example, you could dollar-cost average the first £400 of your £500 investment and hold the last £100 back. Then if your chosen crypto takes a massive hit in value, you can use that last £100 to buy in at a very cheap price.
Although, this tactic means you’ll need to hold your nerve and buy when all the lines are telling you to sell.
4. Have some price targets in mind.
It’s a good idea to have some buy and sell prices in mind. So decide what price you’ll be happy selling at and when your crypto hits that number sell a portion of it. Many people, for example, choose to sell 50% when their investment doubles in value. The idea is then you’ve made your money back, and you’re playing with the house’s money.
By the same token, it’s a good idea to have a buy price in mind. This helps you keep a level when the price drops.
If you have a buy price in mind for the cash you were holding back, it stops you trying to guess the bottom and missing out on great deal on your chosen crypto. Again though, this one is very difficult to do psychologically, but it is how some of the best gains are made.
In conclusion, markets will crash. You need to expect this. Keep your hands strong by investing less.
You need to be comfortable with the fact all of the money you invest could go to zero. You don’t get the highs without the lows. That’s just not how it works, unfortunately.
4. Can I buy a house with bitcoin?
To answer this question, we can go back to one of the biggest events in Bitcoin history: October 2013, random person on the internet buys a Lamborghini with Bitcoin.
In late 2013, a car dealership called Lamborghini Newport Beach announced they would accept Bitcoin as payment.
Then a few weeks later a user on the anonymous message board site, 4 chan posted this:
The documents of sale were leaked and the post was confirmed as true. Someone had officially bought a Lamborghini with Bitcoin.
This is where all the “when Lambo” memes and comments come from that you see in crypto circles.
Ever since this day Lamborghinis and crypto have been intertwined. There have since been many crypto millionaires who’ve bought “lambos” with Bitcoin. But this one was the first.
The idea of buying a Lamborghini with Bitcoin has become the de-facto sign of making it as a crypto investor.
As for the question of whether you can buy a house with Bitcoin. The answer is yes.
There have been a number of property purchases using Bitcoin in the UK over the last 12 months.
Property developer Go Homes sold two houses priced in Bitcoin in December 2017. And they weren’t cheap, one of the houses went for £595,000.
There’s also currently a £17 million Notting Hill mansion on the market, which you can only buy with Bitcoin.
Obviously not all sellers will accept Bitcoin. But the number that do is increasing. So yes, you can absolutely buy a house with Bitcoin – and a lambo to park in the driveway, while you’re at it.
5. Is it easy to buy bitcoin?
Buying Bitcoin used to be a very difficult and technical process, but not anymore.
Today, buying bitcoin is as easy as buying a concert ticket.
The easiest place to buy Bitcoin (or Ethereum) right now is Coinbase.
You can go through its website or mobile app. It’s very easy to set up an account, but you will need to have your driver’s licence or passport to hand so it can verify you.
The verification usually only takes a couple of minutes. But I do know of it taking longer.
Coinbase is insured and keeps the vast majority of its holdings in cold storage. In this sense, it’s a much, much safer place to story your cryptos than a typical exchange. But I would still recommend transferring your holdings to your own wallet.
The price you pay for ease of use and security is fees. Coinbase famously charges high fees. I find the trade-off in terms of ease of use to be okay, but you may disagree.
Another alternative is Coinfloor.
Currently, Coinfloor only deals in Bitcoin, not Ethereum. But it is adding Ethereum very soon.
If you’re putting in or pulling out a lot of money, Coinfloor is probably the way to go. In my experience, for bigger sums, it usually works out cheaper.
But be aware Coinfloor has a minimum deposit amount of £2,500. Which is a bit steep if you’re just getting started.
Its fees are smaller and it is very liquid. It’s also based in London and is highly reputable.
When you first join Coinbase, your weekly buy limits are low. They soon increase, but this can be frustrating. So for larger amounts, you can use Coinfloor.
Until next time,
Editor, Exponential Investor